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Ray of hope for power firms on rate raise issue

Sanjay Jog / Mumbai 11 Jun 12 | 12:54 AM

The power ministry is set to refer the issue of cost escalations and price pass-throughs to the Central Electricity Regulatory Commission (CERC).

The ministry’s decision is a ray of hope for private power players such as Tata Power, Reliance Power, Adani, JSW and state-run NTPC, and comes in the backdrop of state regulators recently rejecting tariff escalations on signed power purchase agreements (PPA), though coal prices have seen major escalations.

The power ministry is likely to refer the matter to the regulator under Section 72(2) (iv) of the Electricity Act, 2003, which gives the regulator the jurisdiction to look into such contractual issues and suggest a framework. Using the same clause, the ministry will also seek CERC’s intervention for alternative scenarios if Coal India fails to deliver on its supply commitments to the power producers. NTPC and state-owned generating companies have been forced to rely on expensive imported coal.

POWER PANGS
Indonesia’s move to change coal pricing has hit cost structure of many projects
* Tata Power’s Mundra UMPP face a setback due to impairment provision 
* Reliance clarified implementation of Krishnapatnam UMPP only after contracted buyers agree on tariff revision 
* Adani Power pitched for renegotiation of tariff
* JSW pleaded for invocation of force majeure clause

The Association of Power Producers (APP), in a series of representations, had argued that Indonesia’s move to link coal prices to international benchmarks had made coal 150 per cent more expensive. According to these producers, projects have become unviable as the players were not being allowed to hike tariffs because they had already signed PPAs with state utilities. These changes imply that the long-term contracts, which were based on discounts or flat pricing, would no longer be honored and would result in steep escalation in prices leading to significant alteration of the viability of imported-coal based projects.

Power producers have also claimed that the abrupt changes in law by the Indonesian and Australian governments have led to a huge jump in coal cost and the earlier contracts were no more enforceable. The situation, they argued, becomes more difficult as domestic-coal based projects enjoy a pass-through if there are changes in law. To get a level-playing field for imported coal-fired plants, these players want a similar regulatory framework that has in-built flexibility to address such overseas shocks.

A power ministry official, who did not want to be identified, told Business Standard: “CERC will be requested to examine the impact on the contract tariff due to change in law in the coal source countries in respect of coal plants based on imported coal blocks, inability of Coal India and other companies to meet its obligations under letter of assurance, thereby necessitating imports to meet PPA obligations for linkage projects. Besides, CERC may be urged to look into delays and denial in receiving clearance from ministry of environment and forests for captive coal blocks which have necessitated use of alternative source of coal for captive coal based projects."

The official said CERC may initiate action where its tariff had been adopted and it can forward appropriate advisories for state electricity regulatory commissions and state governments to be issued by the power ministry. Tata Power suffered a major setback due to impairment provision for its Mundra ultra mega power project in the fourth quarter of FY12.

The company had bagged the Mundra project in 2007 on the basis of the lowest tariff bid of Rs 2.26 per unit. However, Indonesia’s move to change coal pricing impacted the cost structure and the company has said there was a room for tariff revision for Mundra UMPP. Reliance Power has indicated that it would not implement Rs 17,500-crore Krishn-apatnam ultra mega power project in Andhra Pradesh unless contracted buyers agree on tariff revision to accommodate the increase in fuel cost from the recent change in the Indonesian coal pricing law.

Adani Power, which has entered into about six PPAs for supply of 7,200 MW to utilities of Gujarat, Harayana, Maharashtra and Rajasthan, has made a strong case for renegotiation of tariffs. Moreover, JSW Energy has approached the regulatory commission in Maharashtra to invoke force majeure under article 12.3 of the PPA for supply of 300 MW to MahaVitaran as change in the coal pricing by Indonesia was beyond its control.

This, according to APPs calculation, has impacted 14,240 MW of generating capacities. Moreover, power plants with capacity of 37,680 MW would need to import coal to meet PPA obligations due to inability of Coal India and other companies to supply coal as per the letter of assurance. According to APP, the contractual framework does not allow revision of tariffs and therefore CERC be approached to provide framework for the resolution of issues faced by imported coal-based plants.

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